A boring machine is lowered to the bottom of the bore pit to tunnel using a cutting head mounted on an auger. The auger rotates through a bore tube, both of which are pushed forward as the hole is cut. The pipeline is then installed through the bored hole and welded to the adjacent pipeline. . . . Major factors limiting the success of a boring operation include the crossing distance, subsurface soil and geologic conditions, and existing topography. Boring operations typically occur over crossing distance of 50 to 60 feet. The maximum length a bore could achieve in ideal soil conditions typically does not exceed 400 feet. The Williams Companies, Inc., Subsurface Pipe Installation (2014).

The below figure illustrates how boring is used to pass beneath a roadway.

Horizontal Directional Drilling

Unlike boring, an HDD can be used to install subsurface pipe over great distances. The longest successful land-based 30-inch HDD is just under 7,000 feet in length. . . . Factors which affect the success of an HDD operation include crossing distance, subsurface soil and geologic conditions, and existing topography. Risks associated with a HDD crossing technique include potential inadvertent returns of fluids during HDD drilling operations and potential hole collapse during construction. The longer the length of the HDD, the more forces are applied to the pipe and the larger potential for failures. The Williams Companies, Inc., Subsurface Pipe Installation (2014).

Earlier this month, I had the opportunity to visit an HDD that was underway. The below image shows two different sized reamers that are used to expand the diameter of pipeline tunnels. The wider the tunnel, the more reamers are required. Each tunnel begins with a small diameter pilot hole, which is then widened with sequential passes down the hole—each using a larger diameter reamer.

These reamers are attached to the end of a drill string. The video below shows the rig spinning the drill string to advance the reamer through the earth. The entrance to the HDD tunnel is directly behind the photographer.

The shavings from the drilling progress and related mud flow back out of the hole in the video below.

The returning mud is then processed and disposed of in the following video.

When the tunnel is complete, the pipeline is inserted and pulled through the hole as depicted below.

HDD risks include (i) the hole collapsing before the pipeline can be pulled through or (ii) the pipeline getting stuck during the pull through.

Direct Pipe Installation

Direct Pipe is a trenchless method that combines the advantage of established pipeline installation methods of microtunnelling and HDD. Direct Pipe installations may be much shorter and shallower than HDD installations because the excavation is continuously cased, reducing the risk of hole collapse and subsequent settlement. The Williams Companies, Inc., Subsurface Pipe Installation (2014).

As described above, the HDD method creates the tunnel first and then, as a second step, the pipeline is pulled through it. With direct pipe installations, these two steps happen simultaneously. The direct pipe drilling head is attached to the end of the pipeline, such that as the drill head advances through the earth, the pipeline is pushed/pulled along behind it. The returns from the drilling are delivered back to the surface via umbilicals inside the advancing pipeline. The below figure illustrates how the drilling mechanism (far left) is attached to the pipeline.

The following figure depicts a direct pipe installation passing beneath a river.

One risk of the direct pipe method is a prolonged mechanical breakdown in the midst of the drill. If the drilling is halted for too long, the pipeline can adhere to the sides of its own tunnel, thereby making it difficult to continue the pipeline’s advance.

Drilling Issues in Construction Agreements

The principal contractual issue that arises from drilling is which party bears the risk of a failed hole—or one that is more expensive than anticipated. Pipeline construction contracts often include “no hole, no pay” clauses, which (i) make the drilling contractor’s compensation contingent on success, and/or (ii) only pay the drilling contractor a fixed fee irrespective of how much it actually costs to complete the hole (or how many times it has to be drilled). Such clauses can increase the cost of underground installations, since the drilling contractor will build into its price the risk of failure.

There also is the related question of under what circumstances, if any, the drilling contractor’s compensation can be increased. What happens if, for example, the drilling contractor encounters unanticipated subsurface conditions? Even if sample cores are taken and studied, the conditions may vary between the sampling locations. The agreement should make clear whether the owner or the contractor bears the risk of unknown conditions.

While circumstances vary by project, it is better for such drilling risks to be discussed in advance and addressed in the construction agreement—rather than after a problem develops.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 80,240) discusses issues in the field of energy law, with periodic posts at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

]]>https://gaillelaw.com/2018/09/24/comparison-of-pipeline-drilling-methods-bores-hdds-direct-pipes-gaille-energy-blog-issue-75/feed/0scottgailleScreen Shot 2018-09-23 at 3.53.37 PMIMG_1852.PNGScreen Shot 2018-09-23 at 4.51.02 PMScreen Shot 2018-09-23 at 3.22.41 PMScreen Shot 2018-09-23 at 3.34.59 PMgIMG_1796 2gIMG_1794gIMG_1792Pipeline Crossings of Underground Obstructions [Gaille Energy Blog Issue 74]https://gaillelaw.com/2018/09/10/pipeline-crossings-of-underground-obstructions-gaille-energy-blog-issue-74/
https://gaillelaw.com/2018/09/10/pipeline-crossings-of-underground-obstructions-gaille-energy-blog-issue-74/#respondMon, 10 Sep 2018 13:04:12 +0000http://gaillelaw.com/?p=1817Continue Reading →]]>More than 2.5 million miles of pipeline move American oil and gas production to refineries and consumers. The U.S. Energy Information Administration is tracking an additional $100 billion of new natural gas projects, which would add more than 10,000 miles to the existing network.

Pipeline construction requires a trench deep enough so that the top of the pipeline is buried ~3-4 feet below the surface.

New pipeline trenches necessarily encounter many preexisting buried utilities, including other oil and gas pipelines; water, irrigation, and sewage pipes; television cables; and fiber optic telecommunication lines. Each of these obstacles must be navigated by the contractor, driving up the cost of construction.

For example, the depth of a new pipeline may need to be lowered further so that it safely passes beneath an existing one. The below figure from the Interstate Natural Gas Association of America illustrates how one pipeline can be constructed beneath another.

The lowering of the pipeline requires additional work and cost, including tie-in welding that would not have been required in the absence of the foreign line. While a contractor may be able to obtain a list of line locations from public databases, these are often incomplete. How can the parties manage the risk that the contractor will encounter unknown (and unpriced) foreign lines during the new pipeline’s construction?

Unit Pricing for Crossings of Underground Obstructions

The construction agreement can establish a pre-negotiated (unit) price for each unanticipated obstruction. For example, the contractor may be paid a flat fee of “$30,000 for each unknown buried utility crossing.” One issue with unit prices for line crossings is that the cost incurred by the contractor varies from crossing to crossing, potentially leaving one of the parties with a windfall.

Another issue is how should crossings be counted? In the figure below, there are three foreign pipelines clustered together.

Construction of the same installation is required for either one or three foreign lines—because once the pipeline has been lowered for the first foreign line, the other two are incidentally bypassed. Should the contractor get paid for one utility crossing ($30,000) or three utility crossings ($90,000)?

The answer depends on whether the word crossing is used in its ordinary meaning (crossing the street) or in its specialized, industry meaning (a crossing installation). In the natural gas industry, the term “crossing” refers to the constructed facility that lowers the elevation of the pipeline so it can pass beneath a foreign line. While three buried utilities are being crossed in the ordinary meaning of the word, there is only one crossing facility that needs to be constructed to pass beneath all three. Which interpretation prevails may depend on whether the agreement includes the convention of technical interpretation:

“Words having well-known technical or natural gas or petroleum pipeline industry meanings are used in this Agreement in accordance with such recognized meanings.”

The above example also highlights why unit pricing provisions for utility crossings should include additional language to clarify that the contractor is being paid for constructing a particular kind of facility—rather than how many foreign lines they come across:

“Underground Obstruction” means one or more submerged or buried structure(s) in the ROW that require(s): (a) the use of tie-ins to install the pipeline in order to avoid the obstruction(s) and (b) the lowering of the pipeline below the obstruction(s) to obtain the separation required by the Specifications. For purposes of clarity, if multiple obstructions are bypassed through a lowering of the pipeline, then the group of obstructions shall constitute only one (1) Underground Obstruction.

The above language forecloses the possibility that a clever contractor might argue that it should be paid $30,000 for each foreign line the pipeline happens to pass beneath, thereby giving it a windfall of 2X, 3X, or more of its actual costs.

Actual Costs of Obstructions

Alternatively, the contractor can be paid its actual, incremental costs for encountering unknown obstructions. For example, the owner may have agreed to pay the contractor a lump sum of $500 million to build the pipeline. An exhibit to their agreement lists each of the known pipeline crossings that are included in the $500 million lump sum price.

The agreement then provides an adjustment mechanism by which the contractor can seek increases to the lump sum for unknown obstructions. When the contractor encounters an unknown utility, it can seek a price adjustment to the lump sum equal to the incremental cost of crossing it. Such an approach avoids some of the issues encountered with unit pricing, such as how to count crossings and whether actual costs will be more or less than the unit price.

The principal risks for the owner of utilizing actual costs are that the contractor might: (i) shift costs from the lump sum work to the crossing work or (ii) incur higher than expected costs for crossings (since the price cap of the lump sum has been removed in those cases). One way for the owner to mitigate these concerns is by limiting the contractor’s reimbursement to costs incurred in accordance with good industry practices:

“Good Industry Practices” means the actions, practices, methods, techniques, and standards that:
(a) are generally accepted by that segment of the United States pipeline industry operating pipeline facilities similar to those operated by the Owner;
(b) should be adopted by a party exercising that degree of knowledge, skill, diligence, prudence, foresight, and use of funding that would reasonably and ordinarily be expected from qualified, skilled, and experienced professional contractors specializing in the performance of work similar to the work required by this Agreement; and
(c) conform to this Agreement and applicable laws, codes, and standards.

The use of “good industry practices” to limit the contractor’s reimbursement of its actual costs provides the owner with a control by which it can refuse to reimburse costs for a botched or inefficient crossing installation.

While unanticipated crossings can be compensated through unit prices or actual costs, both approaches require specialized controls to ensure the contractor is neither penalized nor rewarded for encountering unknown obstructions.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 78,834) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

Lawyers in the energy industry bear a particularly steep learning curve. It is not enough to just be an expert in legal disciplines such as transactions or litigation. Industry expertise is required, as well. Energy law is a many-layered cake of politics, regulations, joint ventures, and industry practice—iced and sprinkled with technical complexity. Practitioners must also understand energy economics, engineering, and geoscience, among other disciplines. Energy Law Journal.

The first five years after law school is a critical period. That’s when energy lawyers must master a whole industry and its many specialized contracts. It’s also when career trajectories are established—good or bad. As both a practitioner and an academic, I’ve watched hundreds of my former students navigate their early careers. It’s more challenging now that it was in the early 1990s, but many of the same rules still apply:

Mentorship Is Essential. Mastering the maze of energy law requires a guide. At Vinson & Elkins, senior partner Bert Tabor was my first mentor. I spent many hours in his office as he patiently taught me what I needed to know. When I moved to Oxy, the General Counsel there, Antonio D’Amico, brought me up the learning curve of international contracts. The most important question for a young energy lawyer is: “Who will my mentor be?”

Build a Book of Business. Large law firms are like giant revolving doors, into which many enter—but only a few will be asked to stay. The vast majority of associates will leave after a few years. What distinguishes associates who become partner from those who don’t? Some become partner by inheriting a retiring mentor’s clients; others by being in the right place at the right time—the firm is growing its energy practice and needs another partner. But if associates want to control their own destiny, they need to develop their own book of business.

When Should an Associate Switch Firms? Associates should leave their law firm only when they have no mentor, are unable to develop (or inherit) a book of business, or otherwise have political/personal conflicts with the firm’s culture. In these cases, their days are numbered. They are merely doing someone else’s business until they eventually get replaced with a new crop of first-year associates.

Switch Jobs Only When Offered Materially Better Compensation and/or More Responsibility. Too many young energy lawyers hop between law firms, seeking the greener pasture of a small pay raise. The risks are usually not worth it. These associates have to start over, developing new relationships and proving themselves all over again. They may not find mentors. They may not get along with their new partners. Lateral moves also are harder to explain (than clear promotions).

In-House Opportunities for Young Energy Lawyers. You can’t have your cake and eat it too. Less time typically equates to less pay and responsibility, and the best in-house positions require just as many hours as law firms. At large companies, the best in-house positions for young energy lawyers are in business development or international units. Younger energy lawyers also may get offers to become the General Counsel for a private equity-backed or small public company. The equity compensation from such growth-oriented companies can easily surpass average partner profits at law firms. Don’t jump too early. Wait for the right opportunity.

Law Firm and Corporate Politics Is Chain-Driven. Each person has a team of people under them. If the person at the top rises, so does the team. Hitch yourself to success, and you will be pulled along. If the person you are hitched to is in trouble, your days also are numbered.

Experience Equals Fulfillment. Many things in life are hard to enjoy if you’re not good at them. Starting the practice of energy law is like the first time you picked up a golf club or tennis racket. The early years can be overwhelming, confusing, and stressful. Don’t be discouraged. A career in energy law is a marathon. The more you learn, the more you’ll enjoy it. Whether you are a college professor or a big law partner, happiness correlates with realizing your potential. If you could have done more, you’ll know it—and it will erode your happiness. As you become a better lawyer, the happier you’ll be.

Don’t Compare Yourself to Others. My first year out of law school, I clerked for Judge Wilkinson on the U.S. Court of Appeals. I had two co-clerks, Liz and Sri. Liz is now the Dean of Stanford Law School, and Sri is a judge on the United States Court of Appeals for the D.C. Circuit. One of my friends from Law School became the first General Counsel for a small technology start-up—called Facebook. The world is a big place, and there’s plenty of room for everyone to be happy. Comparison is a recipe for unhappiness. As Voltaire wisely advised in the concluding words of Candide, “we must cultivate our garden.”

Over the last three years, I’ve been building my own energy law firm, GAILLE PLLC. Our business model is founded on the type of mentorship I received from Bert Tabor and Antonio D’Amico, and the year I spent clerking for Judge Wilkinson. I have a system for teaching my associates the major contracts used in the energy industry. My goal is to bring them up the learning curve more quickly than big law can, so that my associates are better energy lawyers than their equivalents elsewhere. Teaching also is its own reward. As Winston Churchill once said:

“We make a living by what we get, we make a life by what we give.”

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 76,491) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

]]>https://gaillelaw.com/2018/09/03/career-advice-for-young-energy-lawyers-gaille-energy-blog-issue-73/feed/0Screen Shot 2018-09-02 at 1.36.03 PMscottgailleScreen Shot 2018-09-02 at 1.07.27 PMHow to Get A’s in Law School [Gaille Energy Blog Issue 72]https://gaillelaw.com/2018/08/27/how-to-get-as-in-law-school/
https://gaillelaw.com/2018/08/27/how-to-get-as-in-law-school/#respondMon, 27 Aug 2018 14:47:48 +0000http://gaillelaw.com/?p=1795Continue Reading →]]>I’m looking forward to teaching the Energy Law Seminar again this Fall at The University of Chicago. As a professor there, I am often approached by prospective law students seeking advice about law school and legal careers. My guidance always starts with the obvious fact that performance in law school correlates strongly with more, and better, career options. In this blog, I share a study system that was taught to me in the summer of 1992 (just before I started law school). More than a quarter of a century later, technology has changed but the system still works.

Avoid Study Groups. Spending hours with your fellow 1Ls is at best a waste of limited time. You will not learn anything from them that you need to know for your exam. Exposure to their comments will make it harder for you to remember what the professor said in class. It may even confuse you. Remember, your grade will only be based on mastering what the professor is teaching you.

Read All Assignments the Day before Class. If you do not read what the professor has assigned, you will have a harder time understanding the professor’s lecture. You will be one step behind. Read these assignments the day before class, ensuring they will be fresh in your mind. Never read your assignments the same day as your class. You might underestimate how long it takes. Also, something might happen that prevents you from completing the assignment. There is no need to take notes while reading. You should not try to guess what is important about a reading, as doing so may pollute your memory with observations (other than those your professor will make in class). Just read the assignments.

Attend All Classes and Take Detailed Notes of the Professor’s Lectures (But Not Student Comments). The professor is going to test you on what he says in class. This means you should do your best to attend each and every lecture. Take detailed notes of everything the professor says and only what he says. Never write down student answers or comments, or even your own observations. Notes should be hand written rather than typed into a computer.

After Class, Transform the Professor’s Lecture Notes into a Computer Outline. Learning is reinforced by different senses. We used our eyes to read the assignment before class. We used our ears to listen to what the professor was saying. We used our hands to write down what the professor said. Now, we are going to re-organize what we wrote into an outline. The re-typing of what we previously heard and wrote earlier in the day reinforces memory. It should be done on the same day as the lecture. Each day later decreases the quality of memory reinforcement. The outline also helps us identify any areas where you did not fully understand the professor.

Visit the Professor at Least Two Times During Office Hours. There will be issues that you do not fully understand. Do not ask your fellow students for guidance. Do not try to get answers from the Internet or study guides. Go and talk to your professor. It is the professor’s view that you will be tested on. Moreover, we professors enjoy talking to students one-on-one. In fact, you would be surprised how few students make use of our office hours. We do not want to see you every week, but plan on visiting once during the middle of the course and a second time near the end. Most professors include a participation component to their grades. A couple of office visits should add a few points to your participation grade. It also helps professors get to know you, which sets the stage for meaningful letters of recommendation for judicial clerkships.

Study Your Outline Only, Avoiding Other Guides. As exams approach, study only the content of your outline. Never pollute your mind with other students’ outlines or material from books or the Internet.

Use Your Professor’s Past Exams and Answers as Practice. Some law schools make past exams available in the library. A professor’s past exams are highly predictive of what types of issues and questions you will see on your exam. The week prior to your exam, you can take these past exams as practice tests. Even better, some professors place the top one or two exam answers in the library file. Do not look at these until after you have written the practice exam. Then compare them to your practice answer.

The preceding steps focus on traditional issue-spotting exams. That is, each answer is graded based on how many issues it identifies and properly analyzes. The student who receives the highest grade is the one who identified and correctly analyzed the greatest number of issues. Professors have their own checklist of issues they are looking for, which reflects what they taught in class. Occasionally, we give a point here or there for an insight we had not anticipated, but far more often such extracurricular insights are irrelevant or wrong (and receive no points).

During the second and third years of law school, many grades are based on papers. While steps 1-5 still apply to these courses, in lieu of Steps 6-7, you should read the professor’s published works, including law review articles and blogs. Finally, before selecting a topic, I would encourage you to discuss a short-list of three paper topics with your professor. How interested did the professor seem in each topic and your approach? Choose the one that the professor seemed most interested in. When we are reading thirty or forty essays, our level of interest can matter.

The preceding system focuses your time and mind on the universe of information that matters most. It also creates a structure for when you will do each type of work, which is a bulwark against procrastination. Systems increase the probability that the work will get done. Remember, law school A’s are not won by being smarter. Everyone in your class is equally smart. Law school grading is a game of inches. If you diligently follow this system, you will identify more issues and get higher grades.

University of Chicago Students at Work in Gaille’s Energy Law Seminar

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 74,062) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

This polarization of energy policy grew during President Obama’s administration. In 2009, President Obama sought to pass climate change legislation—but his efforts were blocked by a coalition of Republicans and moderate Democrats. The administration’s response was to bypass Congress with new regulations under existing statutes. The centerpiece of President Obama’s energy policy was the Clean Power Plan:

“The Clean Power Plan was President Barack Obama’s signature policy on climate change, and it represented one of the strongest actions ever taken by the United States to combat global warming. . . . Under the rule, which was finalized in 2015, the E.P.A. assigned each state a goal for limiting emissions from existing power plants and gave the states broad latitude in meeting those goals, such as switching from coal to natural gas or building new wind or solar farms. At the time, the agency estimated that the rule would have reduced greenhouse-gas emissions from the power sector 32 percent below 2005 levels by 2030.” What Is the Clean Power Plan, and How Can Trump Repeal It? (New York Times Oct. 10, 2017).

Scott Segal of Bracewell explained that the Clean Power Plan was “an attempt to sidestep Congress . . . . The only reason the administration resorted to a regulatory process is they couldn’t create the political consensus necessary to pass it through Congress” (U.S. News & World Report Apr. 10, 2015). In early 2016, the Supreme Court voted 5-4 to block the regulation. Among those joining the majority was now-retiring Justice Kennedy.

President Trump has appointed Judge Kavanaugh—a former law clerk to Justice Kennedy—as his replacement. Kavanaugh is currently a Judge on the United States Court of Appeals for the D.C. Circuit, which regularly presides over cases involving environmental and energy regulation. Over the course of his tenure, Kavanaugh has written more than 300 opinions. Let’s take a look at Kavanaugh’s judicial track record.

Judge Kavanaugh with Justice Kennedy

Environmental Regulation

In E.M.E. Homer City Generation v. EPA, 696 F.3d 7 (D.C. Cir. 2012), Kavanaugh wrote the majority opinion for the D.C. Circuit, which struck down EPA regulations of air pollution that crossed state lines. The court stated:

“EPA has used the good neighbor provision to impose massive emissions reduction requirements on upwind States without regard to the limits imposed by the statutory text.”

Most U.S. Court of Appeals cases are heard by a panel of three judges, which means that the majority opinion necessarily reflects a blend of at least two judge’s views. When I clerked for a U.S. Court of Appeals judge, the most interesting opinions often were dissents and concurrences. These were more revealing of a particular judge’s philosophy because they were authored by one person, rather than two or three. Kavanaugh has frequently dissented on matters of environmental regulation:

White Stallion Energy Center LLC v. EPA,748 F.3d 1222 (D.C. Cir. 2014) (concluding that it is “unreasonable for EPA to exclude considerations of costs in determining whether it is ‘appropriate’ to impose significant new regulations on electric utilities”).

Mingo Logan Coal Co. v. EPA, 829 F.3d 710 (D.C. Cir. 2016) (concluding that the EPA violated “common sense and settled law” when it revoked a Clean Water Act permit by considering only the benefits, and not the costs, of doing so).

Mexichem Specialty Resins, Inc. v. EPA, 787 F.3d 544 (D.C. Cir. 2015) (“EPA issued a rule that imposes limits on emissions of hazardous air pollutants by manufacturers of polyvinyl chloride. But EPA later concluded that one category of those limits—the so-called wastewater limits on hazardous air pollutants that may be dissolved in wastewater—was based on bad data. EPA is therefore reconsidering the wastewater limits. EPA says that it will complete the reconsideration process in 2016. … Even EPA itself does not oppose a stay in this case. EPA’s position is telling. Given the circumstances here, as well as our Portland Cement precedent, I would stay the wastewater limits pending judicial review.”).

Texas v. EPA, 726 F.3d 180 (D.C. Cir. 2013) (“In sum, EPA did not have authority to disapprove Texas’s and Wyoming’s SIPs or to issue FIPs to regulate emissions of greenhouse gases in those States until the expiration of the three-year period set forth in EPA’s regulation. Under that binding EPA regulation, States without automatically updating SIPs are entitled to three years to revise their SIPs to cover greenhouse gases. During that time, States have legal authority to issue valid permits under their existing SIPs. EPA’s orders should therefore be vacated.”).

Grocery Mfrs. Ass’n v. EPA, 704 F.3d 1005 (per curiam) (D.C. Cir. 2013) (dissenting from the denial of rehearing en banc; . . . “The panel’s decision . . . is outcome-determinative in a case with significant economic ramifications for the American food and petroleum industries, as well as for American consumers who will ultimately bear some of the costs.”).

Coal for Responsible Regulation, Inc. v. EPA, 2012 WL 6621785 (D.C. Cir. 2012) (dissenting from the denials of rehearing en banc; “Allowing agencies to exercise that kind of statutory re-writing authority could significantly enhance the Executive Branch’s power at the expense of Congress’s and thereby alter the relative balance of powers in the administrative process. I would not go down that road.”).

Howmet Corp. v. EPA, 614 F.3d 544 (D.C. Cir. 2010) (“Of course, there is good reason the 1985 regulations did not go as far as EPA now wants to. Doing so would violate the text of RCRA, the governing statute, which as relevant here confines EPA’s authority to regulation of ‘discarded material.’ We have held that Congress intended the term ‘discarded material’ to carry its ‘ordinary, plain-English meaning’—namely, to cover only material that is ‘disposed of, thrown away, or abandoned.’”).

Sierra Club v. EPA, 536 F.3d 673 (D.C. Cir. 2008) (“The plain meaning of the text controls; courts should not strain to find ambiguity in clarity; courts must ensure that agencies comply with the plain statutory text and not bypass Chevronstep 1 … because I conclude that the challenged EPA rule is entirely consistent with the statutory text and is otherwise reasonable, and because petitioners’ other challenges are not persuasive, I would deny the petition in whole.”).

One of Kavanaugh’s first cases involved the Federal Energy Regulatory Commission’s decision to impose limits on the sharing of information between natural gas pipelines and their affiliated producers/processers. In Natural Fuel Gas Supply Corporation v. FERC, Kavanaugh explained that “FERC here has provided no evidence of a real problem with respect to pipelines’ relationships with non-marketing affiliates. Indeed, [the 2004 order] does not include a single example of abuse by non-marketing affiliates.” More recently, Kavanaugh reversed the FERC for exceeding its “passive and reactive role” under the Federal Power Act: “FERC violated Section 205. FERC’s modifications resulted in an ‘entirely different rate design’ than both PJM’s proposal and PJM’s prior rate scheme.” NRG Power Marketing, LLC v. FERC, 862 F.3d 108, 117 (D.C. Cir. 2017). Kavanaugh also has joined D.C. Circuit opinions denying FERC’s jurisdiction over LNG exports and rejecting efforts to block the flow of oil through the Dakota Access Oil Pipeline.

Narrow Interpretation of Regulatory Authority

Kavanaugh’s record demonstrates that he tends to narrowly interpret regulatory power—relying on the plain meaning of the statutory text. Why is this important to the energy industry? There are two pathways to enacting the phase-out of fossil fuels: (i) additional regulations under existing statutes; or (ii) passing a new climate change law. Kavanaugh likely would vote to block the regulatory avenue. As Kavanaugh said in the oral arguments on the Clear Power Plan, “War is not a blank check. Global warming is not a blank check, either, for the President.” In other words, the President must convince Congress to pass a climate change law. Even when Democrats controlled both the House and Senate, President Obama could not achieve this Herculean undertaking.

Does Kavanaugh Have a Bork Problem?

Kavanaugh’s writings on energy, environment, and regulatory issues also may be strengthening his Democratic opposition. Judge Bork, like Kavanaugh, was a respected judge on the D.C. Circuit. In 1987, Bork was nominated to the Supreme Court by President Reagan but rejected by the Senate in a 58-42 vote, largely along party lines. I spoke with Bork at a Houston dinner in 1990. He predicted that Supreme Court nominations would henceforth be “blank slates”—judges of uncertain beliefs who avoided issues that could influence their appointment prospects.

In law school, I tested Bork’s hypothesis by undertaking a multiple regression analysis of law review articles published by U.S. Court of Appeals judges before and after the hearings. Publishing by United States Court of Appeals Judges: Before and After the Bork Hearings, 26 Journal of Legal Studies 371 (1997). Judge Richard Posner summarized my article in his book, How Judges Think:

“After Robert Bork’s nomination to the Supreme Court failed, in part because of his extrajudicial writings (the largest component of the ‘paper trail’ that did him in), the publication rate of court of appeals judges declined precipitously.”

Judge Bork was right after all. Many judges stopped writing, and it became harder for either the nominating President or the Senate to discern their beliefs.

Kavanaugh has written quite a lot. In addition to his 300 judicial opinions, Kavanaugh has an extrajudicial publication trail of at least seventeen articles:

In his 2014 article, The Courts and the Administrative State, Kavanaugh wrote: “‘(1) Read the statute; (2) read the statute; (3) read the statute!’ So the most important factor in resolving these administrative cases often turns out to be the precise wording of the statutory text.” In talking about war powers, and echoing his oral argument in the Clean Power Plan case, Kavanaugh states: “If there are to be new rules to govern the executive in this kind of war, they need to be created in the usual way by the Congress of the United States.” At the time he wrote these articles, Kavanaugh probably thought they were about boring administrative law—not the hot-button social issues that doomed Judge Bork’s nomination. But climate change has made administrative law a more divisive issue. Kavanaugh’s writings challenge the core of the Democratic Party’s energy and environmental platform, which relies upon administrative fiat. The real battle over Judge Kavanaugh’s nomination may be more about whether a President can change climate policy without Congress first passing a new law. That’s something the energy industry should pay attention to.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 71,319) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

]]>https://gaillelaw.com/2018/07/23/should-the-energy-industry-care-about-judge-kavanaughs-supreme-court-nomination-gaille-energy-blog-issue-71/feed/0scottgailleScreen Shot 2018-07-21 at 1.29.44 PMScreen Shot 2018-07-23 at 2.28.28 PM.pngScreen Shot 2018-07-23 at 2.17.54 PMScreen Shot 2018-07-23 at 2.15.17 PMThe Secret to Judge Posner’s Amazing Productivity [Gaille Energy Blog Issue 70]https://gaillelaw.com/2018/07/13/the-secret-to-judge-posners-amazing-productivity-gaille-energy-blog-issue-70/
https://gaillelaw.com/2018/07/13/the-secret-to-judge-posners-amazing-productivity-gaille-energy-blog-issue-70/#respondFri, 13 Jul 2018 20:34:01 +0000http://gaillelaw.com/?p=1783Continue Reading →]]>Last September, 78-year-old Richard A. Posner retired from the United States Court of Appeals to focus on writing. Even while serving as a full-time judge on the Seventh Circuit and part-time law professor at The University of Chicago, there is no question that Posner has been among the most productive writers ever. Posner has authored more than 50 books and 500 scholarly articles. As a judge, he’s heard oral arguments in over 6,000 cases and written more than 3,300 opinions deciding them.

Photo by Nathan Webster for the New York Times

I met Judge Posner in 1995, when I was a first-year law student at The University of Chicago Law School. He hired me as his research assistant, and I spent the better part of two years supporting his work. Each week, he would give me a wish list of sources for whatever he was writing. In the days before the Internet, this meant scurrying between campus libraries, sometimes in sub-zero temperatures. I also cite-checked his articles and books—ensuring that his words accurately reflected the underlying sources.

A few days before my graduation, I asked Posner, “What is your secret to productivity?” His explanation was remarkably concise. I’m going to share it later, but first, it’s important to acknowledge certain qualities (that he did not mention) contributing to his productivity.

Raw Intelligence. Over the course of my career, I’ve been blessed to know many brilliant academics and jurists. These include Nobel Laureates Ronald Coase and Gary Becker, University of Chicago Professors Richard Epstein and Cass Sunstein, and U.S. Court of Appeals Judges Michael McConnell and J. Harvie Wilkinson III. All of them were born with incredible intellectual firepower. At Chicago, I was able to watch them spar at Law & Economics Workshops. Even among such luminaries, Judge Posner stood out. But intelligence is like wealth. It suffers from diminishing returns. As Charlie Sheen’s character Bud Fox quipped in the movie Wall Street: “How many yachts can you water-ski behind? How much is enough?” At some point, being more intelligent ceases to meaningfully increase productivity. Although Judge Posner has boasted, “I am fast, I cover a lot of ground,” even he is limited by how quickly he can write.

Sacrifices/Discipline. Productivity requires discipline. Human beings cannot manufacture more time, and productivity is a function of time management. As Judge Posner has explained in many interviews:

“I don’t do much. I don’t take vacations. My wife and I don’t go out often. Sometimes for dinner or the theater, but not often. So I work weekends, nights. I have lots of time and I write.” “When you’re just talking with your friends about trivia, what’s the point?” “I don’t go to cocktail parties.”

Sacrificing such leisure activities helped Posner create time for writing.

Structure. Structure also advances productivity. The Posner I worked with liked his routines. He got up at the same time every morning, went to the courthouse, and either heard cases or wrote judicial opinions. Afterwards, he often met with his research assistants or taught courses at The University of Chicago Law School. Then he went home and wrote until dinner, followed by more writing until 11:30 at night, when he would take a walk with his wife before going to bed. On the weekends, he’d exercise and keep writing. He wrote seven days a week.

But none of the above was mentioned in Judge Posner’s answer to my question. In fact, he expressly disavowed having any routine. Posner does not have a quota of pages to write each day. Nor does he block off specific times for writing. Rather, Judge Posner said the secret to his productivity is integration. He integrates writing into the very fabric of his life. Writing fills every gap when he is not doing something else. Writing is the background default, seven days a week, 365 days a year.

I remember being surprised by his answer. It’s funny how a few words can change how one thinks. Until then, I viewed time as being walled off between work and leisure. I had been more of a separator than an integrator. Once my day’s work was done, I disconnected from it. I didn’t work when I was on vacation.

But Posner’s answer changed me, and I transformed myself from a separator to an integrator. Twenty-three years later, I continue to benefit from Judge Posner’s advice. Not having artificial boundaries has increased my productivity. When I have extra time, I fill it by working on client matters or writing books and articles. The extra hours earned from integration have added up over the years. Counterintuitively, integration also can be liberating. I don’t worry about going on vacations, being out of the office, or getting calls on the weekends—because I expect to be working at some point. Instead of work stacking up, it gets addressed on a continuous basis.

Ultimately, productivity is all about time. A television miniseries about Henry VIII recently showed the King, late in life, having dinner with his closest friend, the Duke of Suffolk.

King Henry VIII: In these last days Your Grace, I have been thinking a great deal about loss. What loss Your Grace, is to man most irrecoverable?

Duke of Suffolk: His virtue.

King Henry VIII: No, for by his actions, he may redeem his virtue.

Duke of Suffolk: Then his honor.

King Henry VIII: No, for again he may find the means to recover it.

Their conversation could go on and on. Fortunes can be lost and recovered. The same is true of health. While people are irreplaceable, there can be new loves, friendships, children, and grandchildren.

Duke of Suffolk: Then I cannot say, Your Majesty.

King Henry VIII: Time, Your Grace. Of all losses, time is the most irrecoverable, for it can never be redeemed.

Curious about whether such a conversation actually took place, I consulted Alison Weir and Margaret George, authors of Henry VIII biographies. Both confirmed there is no such historical account. Even so, the story does resonate. Think of how careful we are to protect our loved ones, health, bank accounts, homes, and reputations. Are we as careful about our time?

Maybe you do not want to spend your background time as Judge Posner does, writing books and articles. But when minutes or hours become available, how do you want to spend them? Perhaps the universal lesson from Judge Posner’s secret to productivity is that we need to make a conscious decision about how we spend the margins of our lives. If we fail to do so, we risk letting time irretrievably slip away.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 70,158) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

The Solitaire travels with a fleet of smaller vessels that ferry pipe, personnel, and supplies to and from shore. As our helicopter approached, new pipe was being loaded onto the Solitaire’s deck from a support vessel.

The helipad is perched on the front of the Solitaire, and notwithstanding gusty 35-mph winds, the pilot made the landing look easy.

Our tour commenced with the living quarters for Solitaire’s approximately 500-member crew, which included a cafeteria, hospital, and basketball court. Then we made our way to Solitaire’s bridge, which offered panoramic views over the vessel.

Views from the Bridge

The walls of the bridge were lined with video monitors showing locations throughout the Solitaire, as well as underwater views of the descending pipeline. The underwater cameras regularly captured schools of large fish swimming by.

Next on the tour was the rear deck, where stacks of newly loaded concrete-coated pipe were awaiting assembly.

Subsea pipes are coated in concrete to provide enhanced stability. The below figure (from ShawCor) illustrates how concrete coating is applied to the underlying steel:

The pipe is fed from the deck into the firing line, where pipe edges are bevelled in preparation for welding. Crews of welders working at different stations then simultaneously connect several pieces of pipe together. The firing line is very hot, and personnel wear air conditioned suits to keep them cool in the demanding environment.

The Firing Line

Once the new pipe segments are connected, the Solitaire moves forward, allowing the new section to gradually exit the vessel and descend to the seafloor. This pipeline lay technique is called the S-lay.

The “S” refers to the shape the pipe forms between the vessel and the seabed as it is laid. In the S-lay method, single lengths of steel pipe (joints) are welded, inspected and coated in a horizontal working plane (firing line) on board a pipelay vessel. As the vessel moves forward, the pipe gradually exits the firing line, curving downward through the water until it reaches the touchdown point on the seabed. As more pipe is paid out – under its own weight it assumes the “S”‑shaped curve. The curvature of the upper section of the pipeline (the overbend) is controlled by a stinger, a steel structure with rollers protruding from the end of the firing line to prevent buckling of the pipe . The curvature in the lower section of the pipeline (the sagbend) is controlled by pipe tensioners, caterpillar tracks that grip the pipe. The amount of tension is one of the most important factors in the capabilities of an S-lay vessel. Allseas Web Page.

The S-lay is illustrated below:

Below was my view as the pipe exited the Solitaire.

When I first arrived at Vinson & Elkins and started working on global energy projects, I was fascinated by the industry’s extraordinary engineering and technology. I still am. Every new project presents the opportunity to learn something new. I remind my students at Rice and Chicago that success in the energy industry often requires being a polymath. One has to develop an understanding of many different fields. After all, how can you effectively negotiate a pipeline contract if you don’t understand how a pipeline works?

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 69,529) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

]]>https://gaillelaw.com/2018/07/08/offshore-pipelines-visiting-the-allseas-solitaire-gaille-energy-blog-issue-69/feed/1scottgailleScreen Shot 2018-07-06 at 11.28.27 AMScreen Shot 2018-07-08 at 11.29.31 AMScreen Shot 2018-07-08 at 11.32.55 AMScreen Shot 2018-07-08 at 11.02.58 AMScreen Shot 2018-07-08 at 11.03.33 AMgIMG_0842gIMG_0848gIMG_0912A New Frontier: Energy and Initial Coin Offerings (ICOs) [Gaille Energy Blog Issue 68]https://gaillelaw.com/2018/06/07/a-new-frontier-energy-and-initial-coin-offerings-icos/
https://gaillelaw.com/2018/06/07/a-new-frontier-energy-and-initial-coin-offerings-icos/#commentsThu, 07 Jun 2018 22:01:20 +0000http://gaillelaw.com/?p=1747Continue Reading →]]>This is a guest blog authored by William Brumfield, an Associate at GAILLE PLLC. Will was a Cafaro Scholar at The University of Chicago Law School, where he earned his Doctor of Law Degree. He received his Bachelor of Arts degree in French with Highest Honors from Southeastern Louisiana University.

If you are not familiar with the cryptocurrency world, you may want to consider acquiring at least some surface-level knowledge. Even now, with Bitcoin and most other cryptocurrencies at a relative low point, the combined market cap of all cryptocurrencies exceeds $300 billion (down from its January 2018 high of over $800 billion). This, after beginning 2017 with a total market cap of under $20 billion. While much has been written about a (or the, depending on your perspective) crypto bubble, it seems established, now, that crypto is more than a passing fad, and will remain with us, even if in diminished form, for some time to come.

I concede that there are many legitimate reasons for continuing widespread unfamiliarity with cryptocurrencies. The purchasing process is complex and usually involves multiple websites; securing your “coins” involves a stream of wallets, passcodes, and seed phrases; and the market is frighteningly volatile. Further, the bulk of the cryptosphere exists entirely online, with a physical presence marked mostly by a modest (but growing) number of Bitcoin ATMs, technical conferences, and hardware wallets. As a millennial who has generally been an early adopter of technology, even I find myself sometimes uncomfortable with the lack of tangibility, and surprised by the inundation of terminology, concepts, and possibilities. But I posit that the initial frustration and continuing challenges are well worth it.

One of the more interesting aspects of the cryptosphere is the Initial Coin Offering, or ICO. “In an ICO, a quantity of the crowdfunded cryptocurrency is sold to investors in the form of ‘tokens’, in exchange for legal tender or other cryptocurrencies such as bitcoin or ethereum. These tokens are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches.” Wikipedia. Over $12 billion has been raised through ICOs, with the vast majority of activity arising in 2017 and 2018, as shown below.

In the energy space, a disproportionate number of (semi-)established coins are electricity- or renewables-focused; Power Ledger, for example, which raised $13 million during its ICO and now has a market cap of $120 million, is an Australian coin that describes itself as a peer-to-peer marketplace for renewable energy. The petro (or petromoneda) is a state-sanctioned Venezuelan cryptocurrency purportedly backed by the country’s oil and mineral reserves. And a group of established oil and gas companies, including BP and Shell, plan to launch a blockchain-based platform for energy commodities trading by the end of the year.

There are a variety of oil and gas-focused coins in the pipeline, but few have yet gained traction or a particularly large portion of market share. One, partnered with law firms Goodwin Procter and King & Spalding, is actively circulating a private placement memorandum amongst Texas investors, describing itself as an energy investment vehicle. Although it mentions potential uses of blockchain technology—smart contracts and automated dispute resolution, among others—its focus is on using the coin as an investment vehicle, with the blockchain elements as trimmings. Its founders pitch their offering as “the first blockchain-based capital market for energy exploration and development” and as a “superior way to capitalize energy projects.” In other words, the ICO’s primary driver is similar to that of any energy equity placement—raising capital from individual investors to acquire, develop, and operate assets.

The ICO regulatory landscape remains murky, but utility tokens, which have an implicit use or value (now or in the future), are considered safer from SEC intervention than such security tokens, which are more akin to buying stock in a company that investors hope will be financially successful. The Howey Test, deriving from a decades-old case, Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946), but still employed today, “considers an instrument to be a security if it displays certain features, like whether profits depend on the actions of a third party or whether the instrument represents an investment in a common enterprise. … If an instrument can prove that it’s a ‘useful item’ in itself—like a barrel of oil or a golf club membership—then it can escape classification as a security.” Joon Ian Wong, “Is ethereum a security? The answer could upend the crypto world” (Quartz, May 3, 2018). Classification as a security, of course, leads to a host of regulatory consequences.

Unregulated ICO offerings are facing increasing skepticism from investors due to their mixed track record. The ICO scene is ripe with scams and ill-conceived ventures. Bitcoin.com reported in February 2018 that 46% of 2017’s ICOs had already failed, with another 13% classified as semi-failed. Deadcoins.com lists 107 “dead” coins that were scams.

Further, the Wall Street Journal recently unearthed hundreds of “questionable” coins—coins with founders who could not be independently identified or verified, some even with stock photos, or whose website or whitepaper plagiarized other, legitimate coins. Shane Shifflett and Coulter Jones, “Buyer Beware: Hundreds of Bitcoin Wannabes Show Hallmarks of Fraud” (Wall Street Journal, May 17, 2018). These are only two of a variety of potential signs of a fraudulent ICO. Others include lacking (or absent) roadmaps and whitepapers; a weak online presence, including on Github (essentially a hub for development and other activity); and hype without substance generally.

Are energy ICOs worth the hassle? While a troubling number of ICOs in other industries have failed, many have succeeded, and some are thriving. Ethereum, NEO, and Ark, for example, were launched by ICOs—Ethereum is the second-largest cryptocurrency by market cap, and NEO and Ark’s combined market cap exceeds $3.5 billion. Notably, all three have behind them communicative, identifiable teams, and promising technology with real and continuous development.

In order for an energy ICO to be successful, its core offering must similarly make use of blockchain technology to offer unique benefits to our industry. Quasi-security ICOs will struggle to compete against efficient (and more established) equity markets, both public and private. They are just a variation on something that already exists—not an entirely new application of blockchain technology.

The cryptosphere is a convoluted, scam-ridden, messy, and risky frontier. But frontiers exist to be conquered.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 67,640) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

Even if both parties must conclude a deal, we must consider the question of Time—by when does each need to reach agreement. One party may absolutely need resolution by the end of the month; the other, within the year. The causes for such Time asymmetries vary greatly. For example, consider a company that owns a valuable asset but has run into financial problems. It needs to sell the asset to stay afloat. The faltering company’s timeline for a transaction is constrained. It has no Time. It must sell now.

On June 24, 1812, Napoleon marched on Russia with 680,000 soldiers, seeking to engage and decisively defeat the weaker Russian army. The Russian’s tactic was to retreat, and as they did, scorch the earth. Whole towns were burned in their wake, leaving little behind to supplement Napoleon’s supply lines. The French did not catch up with the bulk of the Russian army until September 7—near Moscow at Borodino—where Napoleon won a narrow victory.

The Battle of Borodino by Louis Lejeune

When their defeat was evident, the Russians abandoned and burned Moscow—heading even further east. Napoleon walked into Moscow expecting a settlement offer from Tsar Alexander I. Only none came. Not until October 19 did Napoleon realize that he was out of time. His army was short on food, and winter was coming. Napoleon’s retreat back to France left 380,000 of his soldiers dead and 100,000 captured.

French Retreat by Illarion Pryanishnikov

As observed by Tolstoy, Napoleon’s defeat was ultimately caused by his miscalculation of the Time asymmetry. No matter how many soldiers Napoleon had, the Russians had an indefinite Time horizon. They had thousands of miles of countryside to retreat across. Napoleon’s expectation of an attractive peace offer was unfounded—because the Russians knew that logistics and winter would eventually force Napoleon to leave.

Similar situations often play out in negotiations. When I was the general counsel of a shale developer, my company had great oil and gas leases with three- or four-year terms—but lacked the money to drill wells needed to extend these leases. Meanwhile, the clock was ticking day-by-day. If wells were not drilled, the leases would expire and revert back to landowners. In such a case, the company’s entire investment in them would be lost. So along came multi-billion-dollar majors like Hess and EOG to jointly develop the leases—for a price. But Time was not on our side. The big companies knew this and extracted concessions. As painful as those concessions may have been, they were the price of not ending up like Napoleon.

The lesson for negotiators is to always be aware of asymmetrical Time horizons. If your counterparty in a deal or a dispute has a short Time runway—by which they need resolution—then you will be able to extract concessions. The size of those concessions will only grow with Time, as your counterparty’s position becomes more desperate.

If you happen to be the Time-constrained party, then realism must prevail. Do not fall into the so-called “Napoleon Complex,” which is “characterized by overly-aggressive or domineering” behavior (Wikipedia). It will not fool your counterparty. Your failure to shrewdly evaluate your shorter Time horizon only will result in your deal deteriorating—or worse.

Napoleon managed to have a second act, but no happy ending. He was exiled to one of the most remote islands in the world, Saint Helena, where he died at 51.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 64,950) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development, and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.

Royal Dutch Shell says the world could be grappling with a shortage of liquefied natural gas within a decade due to underinvestment in new projects. The Anglo-Dutch energy giant issued the warning in its second annual LNG outlook, which reports on developments in the booming market for natural gas cooled to liquid form for export. Shell says the market for LNG grew by 29 million tons last year, 30 percent more than previously expected. Trading in LNG reached 293 million tons in 2017, up from just 100 million tons at the turn of the century. At nearly 300 million tons, suppliers shipped enough LNG last year to power about 575 million homes, by Shell’s count. Tom DiChristopher, Shell warns of liquefied natural gas shortage as LNG demand blows past expectations (CNBC Feb. 26, 2018)

While pipelines between nations and continents have traditionally dominated the international gas trade, they offer limited options for re­balancing dynamic markets. If circumstances change, their owners can reverse directional flows or adjust capacity (by increasing or reducing compression). In contrast, LNG can respond to market conditions by sending gas to entirely new markets or spreading deliveries across multiple buyers.

The significance of this flexibility is illustrated by the shale revolution’s impact on the United States LNG market. The United States switched from importing to exporting LNG (Seeking Alpha, “Latest Trends In The Global LNG Market – A U.S. Perspective” (Apr. 23, 2018).

Meanwhile, Latin American and African (planned) LNG exports to the United States were diverted to Europe and Asia (see below figure from bp).

Notwithstanding this flexibility, LNG has faced challenges with respect to its cost profile.

The Cost of LNG

LNG consists of three stages, each of which incurs substantial cost:

Step One: Liquefaction Plant

The first step in the chain for transporting LNG is a liquefaction plant. This plant requires an investment of $1.6 to $2 billion dollars for a plant capable of handling 500 million cubic feet per day. Assuming a real rate between 10 to 12 percent, this implies a cost of $1 to $1.30 per thousand cubic feet. Most studies also report costs in that range. Brito, D., & Sheshinski, E., Pipelines and the Exploitation of Gas Reserves in the Middle East (Baker Institute of Public Policy – Rice University 1997) (the “Rice Paper”).

Step Two: LNG Vessels

The second step in the chain is the tanker. LNG must be transported at a temperature of -162 degrees centigrade and requires specialized vessels. These vessels cost $230 million for a 135,000 ton tanker. This is to be compared with a cost $85 million for a 280,000 ton VLCC. The reported shipping rates are $.20 per thousand kilometers or $.32 per mile (Rice Paper).

The below figure provides a further breakdown of vessel costs for various routes:

Step Three: Regasification

The third step is regasification, which typically ranges between “$.35 to $.50 per thousand cubic feet” but can be “as high as $1.00 per thousand cubic feet” in Japan “due to the high cost of land” (Rice Paper).

The below figure from the Rice Paper shows the variable impact of shipping (Step Two) on delivered price, as a function of distance:

The Cost of Pipeline Transportation

The Rice Paper also examined the cost of transporting gas 1,000 miles through various sizes of onshore and offshore pipelines under assumes 15-year and 25-year project life, including the identification of the fixed cost as a percentage of the average cost (approximately half of onshore pipeline and three-quarters of offshore pipeline costs are fixed):

The Rice Paper assumed $40,000 per mile inch for an onshore pipeline and $100,000 for an offshore pipeline (in 1997), but INGAA data indicates pipeline fixed costs are continuing to increase.

More recent studies show even earlier breakeven points (~700 miles and ~2200 miles for offshore and onshore pipelines, respectively):

Technology Appears to Be Reducing LNG Costs

While LNG was initially used over very long distances (for which pipeline projects were not economically justified), technological advances appear to be shifting the breakeven toward shorter distances. The below figure shows how the LNG cost profile declined somewhat from the 1990s to the 2000s:

Floating liquefaction enables even more flexibility than traditional (onshore) liquefaction because the origination end of the LNG train also can be relocated in response to market or economic conditions. With respect to offshore gas discoveries, it also may reduce costs by eliminating the need for pipelines to transport natural gas from offshore wells to the onshore liquefaction plant (the floating liquefaction unit can be positioned on top of the offshore reservoir).

Such technological advances will only further serve to increase global demand for LNG.

About the Gaille Energy Blog. The Gaille Energy Blog (view counter = 64,098) discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of three books on energy law (Construction Energy Development, Shale Energy Development,and International Energy Development).

Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.